Impact of demonetization on banking sector
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POSITIVE IMPACT: Increase in CASA deposits for most banks; lending rates to drop further
The biggest beneficiary from this policy will be the banking sector. This is mainly due to the queues of people depositing cash in the banks – which will result in substantial liquidity with the banks. As the deposits with the banks will increase so will increase the CASA, which will increase the Net Interest Income and the Net earnings of the banks. However, this will not be abnormally high since the RBI has increased the CRR in the short term to mop up some of this liquidity.
As stated above higher CASA means large amount of deposits are in current and savings account. This way the banks get funds at no or very low cost (interest). Banks do not pay interest on the current account deposits and pays a very low % of interest on savings account deposits. Hence, it is a good measure to get deposits at no or very low cost.
As the banks get a lot of liquidity in their hands, they are expected to enhance the borrowing cycle by lending the money at a lower rate of interest. Hence, the interest rate on borrowing will lower down.
NEGATIVE IMPACT: MFIs, NBFCs miss collection cycles
NBFCs and microfinance institutions (MFIs) are under severe stress as their collection cycles (mostly in cash) have gone awry post November 8. Most NBFCs and MFIs have announced ‘collection holidays’ till such time there’s sufficient money in the system.
The government’s demonetization drive may puncture the earnings of most banks this quarter. With most staffers handling the Rs 500 and Rs 1000 note deposits, exchange and withdrawals, “revenue-yielding” operations such as vending loans and cross-selling investment products have taken a backseat in most banks.
The earnings of banks may take a hit in the third and fourth quarter. We may not see loan book growth as most banks are busy facilitating the demonetization process. They’re not aggressively selling a lot of credit products now. That apart, the SME and real estate sectors, to which most banks lend a significant part of their book – are in a state of major flux.
The biggest beneficiary from this policy will be the banking sector. This is mainly due to the queues of people depositing cash in the banks – which will result in substantial liquidity with the banks. As the deposits with the banks will increase so will increase the CASA, which will increase the Net Interest Income and the Net earnings of the banks. However, this will not be abnormally high since the RBI has increased the CRR in the short term to mop up some of this liquidity.
As stated above higher CASA means large amount of deposits are in current and savings account. This way the banks get funds at no or very low cost (interest). Banks do not pay interest on the current account deposits and pays a very low % of interest on savings account deposits. Hence, it is a good measure to get deposits at no or very low cost.
As the banks get a lot of liquidity in their hands, they are expected to enhance the borrowing cycle by lending the money at a lower rate of interest. Hence, the interest rate on borrowing will lower down.
NEGATIVE IMPACT: MFIs, NBFCs miss collection cycles
NBFCs and microfinance institutions (MFIs) are under severe stress as their collection cycles (mostly in cash) have gone awry post November 8. Most NBFCs and MFIs have announced ‘collection holidays’ till such time there’s sufficient money in the system.
The government’s demonetization drive may puncture the earnings of most banks this quarter. With most staffers handling the Rs 500 and Rs 1000 note deposits, exchange and withdrawals, “revenue-yielding” operations such as vending loans and cross-selling investment products have taken a backseat in most banks.
The earnings of banks may take a hit in the third and fourth quarter. We may not see loan book growth as most banks are busy facilitating the demonetization process. They’re not aggressively selling a lot of credit products now. That apart, the SME and real estate sectors, to which most banks lend a significant part of their book – are in a state of major flux.
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